In search of new growth models for big pharma in China

In search of new growth models for big pharma in China

The Chinese pharmaceutical market has emerged as a major driver of revenue growth for global pharmaceutical companies, according to a new report.

The Chinese pharmaceutical market has emerged as a major driver of revenue growth for global pharmaceutical companies, according to a new report published today, “In Search of New Growth Models for Big Pharma in China.” The report was written by McKinsey & Company as Knowledge Partner of the PharmAsia Summit-Shanghai 2013, and published in collaboration with Elsevier Business Intelligence and BayHelix Group, co-organizers of the Summit. Their analysis shows that China’s pharmaceutical market has grown at a rapid 21% compound annual rate over the past five years, reaching 0.6 trillion renminbi (US$98 billion) in retail sales value in 2012. In a recent forecast developed jointly by McKinsey and the China Pharmaceutical Association, China’s pharmaceutical market is projected to continue to grow at around 17% annually through 2020. By then, the market is expected to reach 1.9 trillion renminbi in retail sales value (US$310 billion). Most experts agree that China is likely to become the second-largest pharmaceutical market by 2020, and ultimately, the largest one in the world.

On average, China sales of the top 10 multinational pharmaceutical firms accounted for 3.8% of their global business in 2012, up from 3% just a year earlier. For some companies, the figure is already much higher, reaching 8% to 10%. For many pharmaceutical firms, China is now a key contributor to absolute value growth in global revenues, a trend exacerbated by ongoing pricing and access pressure in Europe and the US, as well as a global wave of patent expirations.

The report shows a substantial increase in revenues among the top multinational pharmaceutical companies in China. From 2005 to 2012, the top 10 companies saw their cumulative sales leap from $2.5 billion to $12.3 billion. Sales of individual brands of drugs are also rising: eighty-five brands of drugs topped $50 million in sales in 2012, compared with just eight brands in 2005. In 2012, the single largest-selling prescription-drug brand reached nearly half a billion dollars in sales, up from just $110 million for the largest drug brand in 2005.

The report is based on research that included a survey of 50 pharmaceutical industry leaders in China. According to the survey, 90% of executives said China is already a top five global strategic priority for their company, while 65% said it would be among their top three global strategic priorities within five years.

Such optimism is fueled in part by the substantial long-term growth potential of China’s pharmaceutical market. The Chinese government is doing its part to promote more spending on this sector, and has established a target for healthcare spending at 7% to 7.5% of GDP by 2020. While higher than the current level of 5.6%, this still falls short of the 18% of GDP in the US, and 12% of GDP in France.

Per capita spending on healthcare in China is also expected to remain low by 2020, suggesting substantial opportunity for further growth in demand. China’s expected per capita spending on healthcare is set to reach just $710 by that year, compared with a projected $5,100 per person in Western Europe and $12,200 in the US.

The incidence of chronic disease will continue to be a major driver of spending on healthcare in China, with treatment accounting for 68% of total healthcare spending today. Recent epidemiology data suggest that the prevalence of diabetes in the Chinese population has historically been underestimated, and is already comparable to that of the US population. Further, Chinese patients still have very limited access to important drug therapies for cancer or immune disorders, representing both a challenge and an enormous opportunity for multinational drug makers.

Multinational drug makers face a number of hurdles in their quest for greater access and faster growth in China. In the survey conducted by McKinsey, 84% of respondents cited the lack of reimbursement for innovative drugs as either a very significant or the most significant barrier to market growth in the near term. Furthermore, 74% cited intensifying pricing pressure, while 70% pointed to the slow registration process for new drugs currently in place, as additional barriers to growth.

Multinational firms have also been ramping up investment in R&D: the number of R&D centers in China has more than quadrupled over the last decade, increasing from seven to 30. Given the enormous market potential, multinational pharmaceutical companies are planning to keep up the pace of investment in R&D in China, with annual spending expected to grow at a compound annual rate of 15%, according to RDPAC, an association of leading R&D-based foreign pharmaceutical makers in China. In the survey of pharmaceutical executives conducted by McKinsey, 88% agreed that forming partnerships with local R&D firms is a major lever for improving their R&D capabilities and outcomes in China.

“China represents a unique opportunity for the pharmaceutical industry. The demographics are undeniable: huge unmet needs, an aging society, and the adoption of Western lifestyles. But real challenges remain, from rising pressure on pricing and costs, as well as emerging reimbursement and access trends, to the government’s drive to reform the operating model of public hospitals. Players need to formulate new strategies if they hope to continue to capture the tremendous opportunity for growth offered by China”, said Franck Le Deu, Partner and leader of McKinsey’s Healthcare Practice in Greater China.

“Our report points to a recognition that innovative drugs are required to differentiate portfolios in China and maintain premium pricing. Industry executives will accelerate the introduction of global innovative products, working with their China-based R&D units and, increasingly, with local partners that can help speed the development of drugs for the Chinese market”, said Joshua Berlin, Head of Emerging Markets at Elsevier Business Intelligence.

“Companies will need to increase engagement with central and local governments to help shape the market, collaborating on new schemes that increase affordability and outreach. And bolder and bigger partnerships will be needed to capture the vast opportunity and minimize risk. Without doubt, the next 12 months will prove as eventful as the past 12 months,” said Jimmy Zhang, Chairman of BayHelix Group.

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About Elsevier Business Intelligence
Elsevier Business Intelligence (www.elsevierbi.com), a global leader in the field of healthcare industry information, provides business intelligence on regulatory, business and reimbursement issues that are vital to the healthcare industry. Through a range of products including publications, conferences, e-learning, databases and reports, Elsevier Business Intelligence places biopharma and medical device professionals, and those who focus on these industries, at the forefront of knowledge, by providing the perfect combination of news and information together with penetrating insight and analysis. Our leading publications include PharmAsia News, IN VIVO and “The Pink Sheet.”

About BayHelix
BayHelix (www.bayhelix.org) is an organization of leaders of Chinese heritage in the global life sciences and healthcare community. We aspire to shape the growth of the life sciences and healthcare industry around the Pacific Rim and beyond, foster and create business opportunities, supply and nurture the leaders for the community, and network and share information and experience. BayHelix is a non-profit organization and its membership is by-invitation-only.

About McKinsey & Company in Greater China
With over 8000 consultants deployed from over 100 offices in 60 countries, McKinsey & Company is a global management consulting firm that advises companies and public institutions on issues concerning strategy, organization, operations, and technology. McKinsey’s Greater China Practice comprises offices located in Beijing, Hong Kong, Shanghai and Taipei. McKinsey has completed nearly 2000 projects in Greater China within the past two decades, helping leading local enterprises improve their management skills and boost their global competitiveness, as well as advising multinational companies seeking to expand their business in the region. Visit www.mckinseychina.com for more information.

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